Tuesday, January 22, 2013

Tue 22 Jan - LOQ, UBI, IDEA, NET, OCDO

Shareholders in virtual queuing system company Lo-Q (LOQ) will be pleased with more good news - Dolly Parton's "Dollywood" theme park has extended the duration of an existing contract, and is to also install the system in a second theme park. I was tempted to make a joke about water parks and buoyancy aids, but thought better of it.

I totally understand that LOQ is a terrific growth company, but that valuation is looking really stretched now - almost 3 times sales, for a company with a fairly standard, sub-10% profit margin. 25 times 2012/13 forecast earnings is pretty eye-watering, but the market clearly believes strong growth will continue.

Badly-worded RNS of the day award goes to Ubisense (UBI) with their schizophrenic trading update, which starts off sounding like a profits warning, gradually warms up, and then ends up sounding positive. It's just all wrong.

Take this sentence for example;

"The Group has displayed good momentum in the second half of the period but timing of some projects has led to revenue growth below market expectations and profitability in line with consensus expectations for the full year."

You start reading it and think, oh here we go, timing of projects, revenue below market expectations, so this is a profits warning. Right? Wrong!
They finish the sentence by saying that profitability is in line with market expectations.

Surely they should have inserted a full stop after the statement about revenue being disappointing? Then started a second sentence saying, "However, profitability will be in line with consensus expectations for the full year." That would have been so much clearer.

It then finished with a really upbeat commentary from the CEO, so some very muddled messages here, and I suspect they will pay the price for that with a softer share price today. The shares look priced very aggressively too, at least double the price that would begin to get me interested. I cannot see why this company has a mkt cap anywhere near £50m, given that it's only forecast to break-even in 2012, and make under £1m profit in 2013.

The ridiculous quote-driven market for small caps is just not working. Yesterday  was another example, where I wanted to buy shares in Craneware (CRW), but faced a ludicrous 15p spread to buy at 400p. So with dealing commission, I'm looking at an instant loss of over 4%. Forget it! So the trade didn't happen.

Instead we need to move to an order-driven market, where potential buyers & sellers are free to just directly put their own orders onto an electronic order book, where deals are matched. There is no need for market makers at all, they're an unnecessary link in the chain, and they impede market liquidity, and load avoidable cost onto transactions. Their neutral book policy is a contradiction in terms! Could a market trader sell vegetables if he had a nil stock policy?! It's absurd.

I fully support ShareSoc's robust submission to the LSE on their recent consultation on the trading of small company shares, which can be seen here;

It is high time that something was done about this, and many other issues too. For example Placings - why can't these just be thrown open electronically to all existing shareholders first, then outside shareholders, through an online auction process, with participants having pre-registered as capable investors beforehand? We have the technology to do this, but we don't use it. Our markets are 20 years (or more!) behind where they could be, in terms of technology & innovation, and I'm sure that holds back smaller growth companies, making it unnecessarily difficult for them to tap into sources of fresh equity.

Ideagen (IDEA) issues Interims to 31 Oct 2012. Whilst up 51%, turnover is only £2.6m (bear in mind the mkt cap is £20m), but they have a high profit margin, with adjusted EBITDA up 47% to £0.75m for the 6 months.

They also raised £6m post period end, in a Placing at around the current share price.  I don't know anything about the company, so can't value it, because smaller growth companies are all about assessing the growth potential, and then forming a valuation around that. Whereas my value investing approach is more about looking at ongoing cashflows, divis, and assets.

Things seem to be going well at Netcall (NET). We met the CEO at a Mello event some time ago, and it sounded a decent company. He sticks in my mind because he had one of the most bizarre accents I've ever heard, which I hope it's not offensive to mention - think half Geordie, half Swedish, and you're in the right ballpark!

Their trading update today for the 6m to 31 Dec 2012 reads well: trading "comfortably in line" with expectations, strong order inflows, double digit sales growth. Net cash of £8.2m also!

The valuation looks pretty reasonable, despite the shares having had a good run already. A PER of 13, for a company where a fifth of the mkt cap is net cash, is not expensive, given that they are performing well too.

Finally, I note that Stuart Rose has appeared as the new Chairman of Ocado (OCDO). What on earth is he thinking of?! Mind you, a key feature of Rose's career in the 15 years or so I've been aware of him, is that he has an uncanny skill in timing his entry into companies when the heavy lifting of a turnaround has already been done, but hasn't yet come through in the figures. So he gets the glory for the turnaround, without actually having to do much work. That's exactly what happened at Arcadia, Bookers, and M&S. So perhaps his exquisite timing is a signal that Ocado may not be the basket-case that many of us think it is?

OK, that's it for now. Have a good day, and see you same time tomorrow morning.

Regards, Paul.

(Paul does not hold any positions in the companies mentioned today)


  1. Paul,
    I appreciate LOQ has a high rating but there is a good reason and we are about to see the exploding growth in revenues due to the huge numbers of contracts signed in the last 18 months.
    The second and third years of those contracts see best utilisation as customer satisfaction is such that repeat users are over 85% and new users join the fun in increasing numbers too!

    Just look at the revenues..historic and forecast.
    2012...29.7m (f)
    2013...39.0m (f)
    2014...41.7m (f)

    Just six months ago revenues for 2013 were only forecast to be 32m so the new contracts announced have made a difference to those and I expect all new contracts to make an ever increasing uplift to 2014 revenues too.
    I am not going to make changes to my prediction that revenues in the current year will be close to £40m but I now feel confident that they will increase by a further 20% next year which would
    be £48m and growth of 100% in just three years!

    That level of top line growth for a company that is cash generative with net cash and dominating its market is why you pay good money for the equity.

    When further contracts are announced and 2014 forecasts uplifted very significantly then you will see the eps growth and zulu rating totally vindicated. This is a great UK success story and my largest holding.


    1. Hi David,

      Good points, well made! Lo-Q is indeed a terrific growth/success story.

      But I'm not sure how much % upside there is on the share price now though, with an £80m mkt cap?

      Cheers, Paul.

  2. Haha, cutting assessment of Rose but I guess we all know someone like that! That aside, I just wanted to say that I found this an interesting and well-written post - I don't have the knowledge or experience of you or carmensfella but I it all made sense, so thanks and keep up the good work!

    Best regards,


    1. Hello Guy,

      It's true about Rose though. John Hoerner turned around Arcadia very decisively, but Rose parachuted in & took the credit, years ago (I've heard that from people who worked there). Same at Bookers and M&S. Fair play to him, he spots opportunities at the turning point. Which is why I'm curious as to why he's taking on Ocado. Maybe there is some potential there after all? (it's a stock I'm very bearish on).

      Cheers, Paul.

  3. I have never known Paulypilot so keen on grammar. But, hey, there's a first time for everybody.

  4. Nothing at all Paul - and I appreciate fully your incisive analysis. It's just I got the impression over a period of years that you didn't care for pedantry at PP on Motley Fool. Clearly grammar can be important in RNS announcements. BTW I had noticed your tendency to sell some of your winners early, as you seem to have done with Home Retail.